9. Chrustuba Inc. is evaluating a new project that would cost $8.0 million at t= 0. There is a 50% chance that the projectwould be highly successful and generate annual after-tax cash flows of $5.4 million during Years 1, 2, and 3. However,there is a 50% chance that it would be less successful and would generate only S1 million for each of the 3 years. If theproject is highly successful, it would open the door for another investment of Ss10 million at the end of Year 2, and thisnew investment could be sold for $20 million at the end of Year 3. Assuming a WACC of 8.5%, what is the project'sexpected NPV (in thousands) after taking into account this growth option? Do not round intermediate calculations.a. $3,942b. $4,318c. $4,506d. S3,755e. $3,37910. Games Unlimited Inc. is considering a new game that would require an investment of $21.0 million. If the new gameis well received, then the project would produce cash flows of $9.5 million a year for 3 years. However, if the market doesnot like the new game, then the cash flows would be only $5.0 million per year. There is a 50% probability of both goodand bad market conditions. The firm could delay the project for a year while it conducts a test to determine if demandwould be strong or weak. The project's cost and expected annual cash flows would be the same whether the project isdelayed or not. If the WACC is 9.2%, what is the value (in thousands) of the investment timing option? Do not roundintermediate calculations.a. $1,356b. $1,288c. $1,492d. $1,627e. $1,424

Net present value (NPV) is the present value of cash flows. It is the difference between the value…

9. Chrustuba Inc. is evaluating a new project that would cost $8.0 million at t= 0. There is a 50% chance that the project would be highly successful and generate annual after-tax cash flows of $5.4 million during Years 1, 2, and 3. However, there is a 50% chance that it would be less successful and would generate only S1 million for each of the 3 years. If the project is highly successful, it would open the door for another investment of S10 million at the end of Year 2, and this new investment could be sold for $20 million at the end of Year 3. Assuming a WACC of 8.5%, what is the project's expected NPV (in thousands) after taking into account this growth option? Do not round intermediate calculations. a. $3,942 b. $4,318 c. S4,506 d. S3,755 e. $3,379

9. Chrustuba Inc. is evaluating a new project that would cost $8.0 million at t= 0. There is a 50% chance that the project would be highly successful and generate annual after-tax cash flows of $5.4 million during Years 1, 2, and 3. However, there is a 50% chance that it would be less successful and would generate only S1 million for each of the 3 years. If the project is highly successful, it would open the door for another investment of S10 million at the end of Year 2, and this new investment could be sold for $20 million at the end of Year 3. Assuming a WACC of 8.5%, what is the project's expected NPV (in thousands) after taking into account this growth option? Do not round intermediate calculations. a. $3,942 b. $4,318 c. S4,506 d. S3,755 e. $3,379

Essentials Of Investments

11th Edition

ISBN:9781260013924

Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Chapter1: Investments: Background And Issues

Section: Chapter Questions

Problem 1PS

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Concept explainers

Production Budget

A budget can be defined as a financial plan designed by an undertaking for a definite period in the future that can contribute towards enhancing the financial success of the business undertaking. It is used to estimate the revenue and expenses. The budget generally takes into account both current and future income and expenses.

Question

9. Chrustuba Inc. is evaluating a new project that would cost $8.0 million at t= 0. There is a 50% chance that the project
would be highly successful and generate annual after-tax cash flows of $5.4 million during Years 1, 2, and 3. However,
there is a 50% chance that it would be less successful and would generate only S1 million for each of the 3 years. If the
project is highly successful, it would open the door for another investment of Ss10 million at the end of Year 2, and this
new investment could be sold for $20 million at the end of Year 3. Assuming a WACC of 8.5%, what is the project's
expected NPV (in thousands) after taking into account this growth option? Do not round intermediate calculations.
a. $3,942
b. $4,318
c. $4,506
d. S3,755
e. $3,379
10. Games Unlimited Inc. is considering a new game that would require an investment of $21.0 million. If the new game
is well received, then the project would produce cash flows of $9.5 million a year for 3 years. However, if the market does
not like the new game, then the cash flows would be only $5.0 million per year. There is a 50% probability of both good
and bad market conditions. The firm could delay the project for a year while it conducts a test to determine if demand
would be strong or weak. The project's cost and expected annual cash flows would be the same whether the project is
delayed or not. If the WACC is 9.2%, what is the value (in thousands) of the investment timing option? Do not round
intermediate calculations.
a. $1,356
b. $1,288
c. $1,492
d. $1,627
e. $1,424

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